CHAPTER 11. LIFE-CYCLE COST SUBGROUP ANALYSIS

TABLE OF CONTENTS

11.1 INTRODUCTION ......................................................................................................... 11-1

11.2 SUBGROUPS DEFINITION ........................................................................................ 11-1

11.2.1 Commercial Consumer Sub-group .................................................................... 11-1

11.2.2 Small Business Commercial Discount Rate ...................................................... 11-8

11.2.3 Life-Cycle Cost and Payback Period Results for Small Business Subgroup .................................................................................................................. 11-9

REFERENCES ........................................................................................................................ 11-11

LIST OF TABLES

Table 11.2.1 NAICS Industries by Building Type.................................................................. 11-2

Table 11.2.2 Example of Establishment Categories: Educational Services NAICS 611 ....... 11-3

Table 11.2.3 Maximum Number of Employees in Small Business by Building Type ........... 11-7

Table 11.2.4 Number of Employees by Building Type and Electricity Consumption 

Category ............................................................................................................. 11-7

Table 11.2.5 Discount Rate Difference between Small Company and Sector Average ......... 11-9

Table 11.2.6 7.5 Ton Units: LCC Results Comparison between Small Business SubGroup and All Buildings .................................................................................. 11-10

Table 11.2.7 15 Ton Units: LCC Results Comparison between Small Business SubGroup and All Buildings .................................................................................. 11-10

Table 11.2.8 7.5 Ton Units: PBP Results Comparison between Small Business SubGroup and All Buildings .................................................................................. 11-10

Table 11.2.9 15 Ton Units: PBP Results Comparison between Small Business SubGroup and All Buildings .................................................................................. 11-10

LIST OF FIGURES

Figure 11.2.1 Assembly: Relationship between Number of Employees and Value of 

Sales ................................................................................................................... 11-4

Figure 11.2.2 Education: Relationship between Number of Employees and Value of 

Sales ................................................................................................................... 11-5

Figure 11.2.3 Food Service: Relationship between Number of Employees and Value of 

Sales ................................................................................................................... 11-5

Figure 11.2.4 Office: Relationship between Number of Employees and Value of Sales ........ 11-6

Figure 11.2.5 Retail: Relationship between Number of Employees and Value of Sales ......... 11-6

11-i 
CHAPTER 11. LIFE-CYCLE COST SUBGROUP ANALYSIS

11.1 INTRODUCTION

The life-cycle cost (LCC) sub-group analysis evaluates impacts on any identifiable 

groups of commercial consumers of commercial unitary air conditioners (CUAC) who may be 

disproportionately affected by a national energy-efficiency standard. DOE accomplished this, in 

part, by analyzing the LCC and payback period (PBPs) for those commercial consumers that fall 

into any specific sub-groups. 

DOE determined the impact on commercial consumer sub-groups using the LCC 

spreadsheet model. Because DOE conducted the LCC and PBP analysis only for CUAC 

equipment (i.e., not for commercial unitary heat pumps (CUHPs)), it conducted the LCC 

subgroup analysis only for CUAC consumers. The standard LCC and PBP analysis (described in 

Chapter 8) includes various types of commercial buildings that use CUAC equipment. The LCC 

spreadsheet model allows for the identification of certain sub-groups of commercial buildings 

which can then be analyzed by sampling only that sub-group. (Chapter 8 explains in detail the 

inputs to the spreadsheet model used in determining the LCC and PBP.) 

This chapter describes the subgroup identification in further detail and gives the results of the 

LCC and PBP analyses for the considered subgroups. 

11.2 SUBGROUPS DEFINITION

11.2.1 Commercial Consumer Sub-group 

DOE identified small businesses as a sub-group that possibly could be disproportionately 

affected by CUAC efficiency standards. DOE was concerned that increases in the purchase price 

of equipment could have negative impacts on small businesses (i.e., those with low annual 

revenues). Only 7.5 ton and 15 ton units are considered in the small business sub-group analysis, 

as it is unlikely that a small business would require a 30 ton unit. 

From the building sample used in the LCC and PBP analysis, DOE identified which 

buildings contain small businesses. To identify buildings used by small businesses, the 

Department used size standards from the Small Business Administration (SBA) to define which 

business entities are considered to be small. The SBA established size standards for types of 

economic activity, or industry, under the North American Industry Classification System 

(NAICS)1

.The building sample used in DOE’s LCC and PBP analysis was defined by the 

building energy use and end-use load characterization analysis (Chapter 6). The building sample 

consisted of the following six building types: assembly (e.g., performing arts facilities), 

education, food services, office, retail, and warehouses (non-refrigerated). For each of these six 

building types, DOE selected and assigned specific representative economic activities from the 

NAICS, as summarized in Table 11.2.1. 

11-1 
Table 11.2.1 NAICS Industries by Building Type

Building Type NAICS Industry

Code Industry Title

Assembly

711

712 

713

Performing arts spectator sports & related industries

Museums, historical sites, & similar institutions

Amusement, gambling, & recreation industries

Education 611 Educational Services

Food Service 722 Food services & drinking places

Office

5222

523 

5242 

531 

532 

533 

541 

621

Nondepository credit intermediation

Securities intermediation & related activities

Agencies, brokerages & other insurance related activities

Real estate

Rental & leasing services

Lessors of intangible assets except copyrighted works

Professional, scientific, & technical services

Ambulatory health care services

Retail

441

442 

443 

444 

445 

446 

447 

448 

451 

452 

453 

811 

812

Motor vehicle & parts dealers

Furniture & home furnishings stores 

Electronics & appliance stores

Building material & garden equipment & supplies dealers 

Food & beverage stores 

Health & personal care stores

Gasoline stations

Clothing & clothing accessories stores 

Sporting goods, hobby, book and music stores 

General merchandise stores

Miscellaneous store retailers

Repair and maintenance

Personal and laundry services

Warehouse 423

424

Merchant wholesalers, durable goods

Merchant wholesalers, nondurable goods

The SBA defines a small business by either its annual receipts (i.e., revenues) or its 

number of employees. Assembly, education, food services, office, and retail businesses are 

generally defined to be small if annual receipts are $6 million or less. Businesses located in 

warehouses are considered to be small if they employ 100 or fewer people. 

As described in the building energy use and end-load characterization analysis, DOE 

drew its building sample from the 1995 and 2003 Commercial Building Energy Consumption 

Surveys (CBECS).

2, 3CBECS provides the number of workers employed, but not the annual 

revenues for each of the records in its building sample. Thus, DOE needed to correlate annual 

revenues with the number of workers to identify the sub-group of small businesses in the 

building sample. Because some individual CBECS building records could represent businesses 

that are part of much larger firms, the small business sub-group identified by DOE could 

possibly over-represent the actual number of small businesses. However, DOE feels that the 

11-2 
results from the analysis provide an adequate indication of whether the small business sub-group 

would be disproportionally advantaged or disadvantaged by a proposed standard. 

DOE used Establishment and Firm Size data series from the U.S. Census Bureau 2007 

Economic Census to define the relationship between annual revenues and the number of workers 

for each of the relevant business activities (assembly,4 education,5 food services,6 office,7, 8, 9, 10

and retail11, 12). The Census data series provide annual receipts, the number of paid employees, 

and the number of establishments by categories of establishments. Establishment categories are 

based on a range of annual receipts (e.g., establishments with receipts of $1 million to less than 

$2.5 million). Within each establishment category, DOE determined an average value for annual 

receipts by dividing the annual receipts by the number of establishments. It performed the same 

type of calculation to arrive at an average number of paid employees for each establishment 

category. To more clearly demonstrate how DOE used the Census Bureau data, Table 11.2.2 

provides a listing of establishment categories for educational services (NAICS code 611). The 

primary data in Table 11.2.2 are drawn directly from the Education Service Establishment and 

Firm Size data series. The derived data (average receipts and average number of employees) are 

in the two right-hand columns. Note that the upper limit of what is considered a small business 

($6 million annual receipts) falls within the establishment category of $5 million to $9.99 

million.

Table 11.2.2 Example of Establishment Categories: Educational Services NAICS 611 

Primary Data from 2007 Economic Census Educational 

Services, Establishment and Firm Size data series Derived Data

Sales size of 

establishment Establishments Receipts

($1000) Employees Average Receipts ($)

Average 

Employees

Establishments with sales 

less than $10,000 836 $5,462 1,075 $6,533 1 

Establishments with sales of

$10,000 to $24,999 2,166 $36,016 2,529 $16,628 1 

Establishments with sales of

$25,000 to $50,000 3,506 $129,055 5,759 $36,810 2 

Establishments with sales of

$50,000 to $99,999 6,609 $489,081 16,392 $74,002 2 

Establishments with sales of

$100,000 to $249,999 13,331 $2,217,064 58,906 $166,309 4 

Establishments with sales of

$250,000 to $499,999 9,838 $3,490,316 78,894 $354,779 8 

Establishments with sales of 

$500,000 to $999,999 6,523 $4,542,752 82,984 $696,421 13 

Establishments with sales of 

$1,000,000 to $2,499,999 4,373 $6,596,468 87,150 $1,508,454 20 

Establishments with sales of 

$2,500,000 to $4,999,999 1,467 $5,049,354 53,541 $3,441,959 36 

Establishments with sales of 

$5,000,000 to $9,999,999 781 $5,360,243 46,676 $6,863,307 60 

Establishments with sales of 

$10,000,000 or more 534 $15,227,571 78,633 $28,516,051 147 

11-3 
By deriving the average receipts and numbers of employees for the establishment 

categories within each of the NAICS industries listed in Table 11.2.1, DOE was able to create a 

data set from which to establish a relationship between receipts (revenues) and number of 

employees (workers) for five of the building types listed in Table 11.2.1. Figures 11.2.1 through 

11.2.5 plot the receipt and employee data sets for each of the five building types. Because the 

SBA generally defines small businesses as those with annual revenues of $6 million or less, DOE 

plotted only data from establishment categories up to and including “establishments with sales of 

$5 million to $9.99 million” in Figures 11.2.1 through 11.2.5. DOE did not provide a figure for 

warehouses because, as noted earlier, businesses located in warehouses are considered to be 

small if they employ 100 or fewer people. 

Figure 11.2.1 Assembly: Relationship between Number of Employees and Value of Sales 

0

20

40

60

80

100

$0 $1 $2 $3 $4 $5 $6 $7 $8

Employees

Sales ($1,000,000)

11-4 
Figure 11.2.2 Education: Relationship between Number of Employees and Value of Sales 

Figure 11.2.3 Food Service: Relationship between Number of Employees and Value of Sales 

0

10

20

30

40

50

60

$0 $1 $2 $3 $4 $5 $6 $7 $8

Employees

Sales ($1,000,000)

0

20

40

60

80

100

$0 $1 $2 $3 $4 $5 $6 $7 $8

Employees

Sales ($1,000,000)

11-5 
Figure 11.2.4 Office: Relationship between Number of Employees and Value of Sales 

Figure 11.2.5 Retail: Relationship between Number of Employees and Value of Sales 

 

0

10

20

30

40

50

60

$0 $1 $2 $3 $4 $5 $6 $7 $8

Employees

Sales ($1,000,000)

0

10

20

30

40

50

60

70

80

$0 $1 $2 $3 $4 $5 $6 $7 $8

Employees

Sales ($1,000,000)

11-6 
 Using the data in Figures 11.2.1 through 11.2.5, DOE estimated the relationship between 

annual value of sales and number of employees for each building type through linear regression. 

Based on the regression parameters, DOE then estimated the number of employees for the 

assembly, education,food services, office, and retail building types associated with annual sales 

of $6 million. 

Table 11.2.3 Maximum Number of Employees in Small Business by Building Type

Building Type Maximum Number 

of Employees

Assembly 70

Education 55

Food Service 98

Office 28

Retail 32

Warehouse 100

With small businesses identified by the number of workers for each building type, DOE 

was able to identify from its building sample which buildings could potentially be occupied by 

small businesses. DOE assigned buildings to the small business subgroup by comparing the 

building electricity consumption category as defined in the building energy use and load 

characterization to the CBECS 2003 average number of employees by building type, as

presented in Table 11.2.3. CBECS 2003 revealed variation in number of employees across 

building types and electricity consumption categories (Table 11.2.4). 

Table 11.2.4 Number of Employees by Building Type and Electricity Consumption 

Category 

Building Type 

and Code

Large 

(>1,000,000 kwh/yr) 

Medium

(100,000 to 

1,000,000 kwh/yr)

Small

(<100,000 kwh/yr) 

Assembly (1) 29 29 23 

Education (2) 74 76 50 

Food Service (4) 15 15 13 

Small Office (8) 34 33 32 

Retail (9) 29 25 17 

Warehouse (10) 90 82 48 

DOE determined that the following buildings should be included in the small business 

subgroup: all assembly, small education, all food service, all small office, all retail, all 

warehouse. The small business subgroup represents approximately 80% of floor space in the full 

building sample. 

11-7 
11.2.2 Small Business Commercial Discount Rate

The Small Business Administration (SBA) defines a small business by its annual receipts 

or its number of employees. CUAC are used throughout the U.S. economy, so DOE did not 

assign a different distribution of CUAC applications or sectors of the economy to this subgroup. 

The capital asset pricing model (CAPM) underestimates the cost of capital for small 

companies. In CAPM, the risk premium β is used to account for the higher returns associated 

with greater risk. However, for small companies, particularly very small companies, historic 

returns have been significantly higher than the CAPM equation predicts. This additional return 

can be accounted for by adding a size premium to the cost of equity for small firms:

Rk fe ( ) β ERP +×+= S

ke = Cost of equity, 

Rf = Expected return on risk-free assets,

β = Risk coefficient of the firm, 

ERP = Equity risk premium, and 

S = Size Premium.

DOE obtained size premium data from Ibbotson Associates’ Stocks, Bonds, Bills, and 

Inflation 2009 Yearbook.

13 For the period of 1926-2008, the average size premium for the smallest 

companies in all industries is 5.81%, implying that on average, historic performance of small 

companies has been 5.81% higher than the CAPM estimate of the small company cost of equity.

a

DOE calculated the real weighted average cost of capital (as described in chapter 8) using 

the cost of equity including a size premium for small companies instead of the CAPM cost of 

equity.14 Table 11.2.5 presents DOE’s estimates of the discount rates for entire sectors, small 

companies specifically, and the small company discount rate premium. 

To estimate the impact of standards specifically on small businesses, the small company 

discount rates for each sector were used in the Life-Cycle Cost and Payback Period analysis 

instead of the sector average discount rates. 

a In this calculation, small companies are defined as companies with market capitalization of less than or equal to 

$218.53 million, the Ibbotson Associates’ definition of Decile 10 companies.

11-8 

 
Table 11.2.5 Discount Rate Difference between Small Company and Sector Average 

Sector

Discount Rate (%)

Average Std Dev

Small Company 

Discount Rate 

Premium

Retail Entire Sector 4.93 1.98 4.06 Small Companies 8.99 2.93

Property 

Owners

Entire Sector 5.15 1.20 3.20 Small Companies 8.36 2.17

Medical 

Services

Entire Sector 4.73 1.66 3.56 Small Companies 8.30 2.47

Industrial Entire Sector 5.17 1.85 3.46 Small Companies 8.64 3.19

Hotels Entire Sector 5.57 1.87 2.77 Small Companies 8.34 3.07

Food 

Service

Entire Sector 4.67 2.00 3.09 Small Companies 7.76 4.02

Office Entire Sector 4.58 2.05 3.06 Small Companies 7.64 3.18

Public Entire Sector 3.74 1.43 0.00 Small Companies 3.74 1.43

11.2.3 Life-Cycle Cost and Payback Period Results for Small Business Sub-group

Tables 11.2.6 - 11.2.7 summarize the LCC results for the small business sub-group for 

each of the CUAC equipment classes, and compare them to the results for the total sample of 

buildings used in the overall LCC analysis. Tables 11.2.8 and 11.2.8 summarize the PBP results. 

Results are provided by trial standard level (TSL). Note that this is an overestimate of the impact 

on small businesses; many small buildings may be owned by the same company, as is the case 

with retail and restaurant chains. As is evident from the LCC and PBP results, the effect of 

higher CUAC standards on small businesses is very similar to the effect on the full sample of 

commercial consumers. Thus, small businesses are not substantially disadvantaged by increased 

CUAC equipment standards, as compared to the general population of commercial consumers. 

11-9 
Table 11.2.6 7.5 Ton Units: LCC Results Comparison between Small Business SubGroup and All Buildings 

TSL IEER

Small Businesses All Buildings

Mean LCC

Mean Decrease 

in LCC from 

Baseline

Percent of 

Units with 

LCC Savings

Mean LCC

Mean Decrease 

in LCC from 

Baseline

Percent of 

Units with 

LCC Savings

Baseline 11.4 $26,756 $29,547

1 12.9 $25,255 $918 61% $27,759 $1,094 61%

2 14.0 $25,564 $610 65% $27,916 $937 72%

3 14.8 $22,279 $3,881 99% $24,058 $4,779 99%

4 19.9 $20,847 $5,313 99% $22,125 $6,711 100%

Table 11.2.7 15 Ton Units: LCC Results Comparison between Small Business SubGroup and All Buildings 

TSL IEER

Small Businesses All Buildings

Mean LCC

Mean Decrease 

in LCC from 

Baseline

Percent of Units 

with LCC 

Savings

Mean LCC

Mean Decrease 

in LCC from 

Baseline

Percent of Units 

with LCC 

Savings

Baseline 11.2 $43,887 $48,409

1 12.2 $42,882 $784 72% $47,078 $1,038 74%

2 13.2 $42,099 $1,552 84% $45,880 $2,214 90%

3 14.2 $41,079 $2,569 88% $44,619 $3,469 93%

4 18.4 $37,749 $5,893 96% $40,575 $7,508 98%

Table 11.2.8 7.5 Ton Units: PBP Results Comparison between Small Business SubGroup and All Buildings 

TSL IEER

Small Businesses All Buildings

Mean PBP 

(years)

Median PBP 

(years)

Mean PBP 

(years)

Median PBP 

(years)

1 12.9 2.4 2.2 2.4 2.2 

2 14.0 10.9 8.0 10.9 8.0 

3 14.8 4.1 3.9 4.1 3.9 

4 19.9 5.1 4.7 5.1 4.7 

Table 11.2.9 15 Ton Units: PBP Results Comparison between Small Business SubGroup and All Buildings 

TSL IEER

Small Businesses All Buildings

Mean PBP 

(years)

Median PBP 

(years)

Mean PBP 

(years)

Median PBP 

(years)

1 12.2 6.7 6.0 6.7 6.0 

2 13.2 8.0 7.2 8.0 7.2 

3 14.2 7.4 6.6 7.4 6.6 

4 18.4 5.6 5.1 5.6 5.1 

11-10
REFERENCES

1. Title 13, Code of Federal Regulations, Chapter I-Small Business Administration, Part 

121-Small Business Administration, Subpart A-Size Eligibility Provisions and Standards. 

2005. 

2. U.S. Energy Information Agency, Commercial Buildings Energy Consumption Survey. 

1995. 

http://www.eia.gov/consumption/commercial/data/1995/index.cfm?view=microdata

3. U.S. Energy Information Agency, Commercial Buildings Energy Consumption Survey. 

2003. http://205.254.135.24/emeu/cbecs/cbecs2003/public_use_2003/cbecs_pudata2003.html

4. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of 

Organization), 2007 Economic Census, Arts, Entertainment, and Recreation Subject 

Series. 2007. https://www.census.gov/econ/census07/

5. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of 

Organization), 2007 Economic Census, Educational Services Subject Series. 2007. 

https://www.census.gov/econ/census07/

6. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of 

Organization), 2007 Economic Census, Accommodation and Food Services Subject 

Series. 2007. https://www.census.gov/econ/census07/

7. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of 

Organization), 2007 Economic Census, Finance and Insurance Subject Series. 2007. 

https://www.census.gov/econ/census07/

8. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of 

Organization), 2007 Economic Census, Real Estate and Rental and Leasing Subject 

Series. 2007. https://www.census.gov/econ/census07/

9. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of 

Organization), 2007 Economic Census, Professional, Scientific, and Technical Services 

Subject Series. 2007. https://www.census.gov/econ/census07/

10. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of 

Organization), 2007 Economic Census, Health Care and Social Assistance Subject 

Series. 2007. https://www.census.gov/econ/census07/

11. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of 

Organization), 2007 Economic Census, Retail Trade Subject Series. 2007. 

https://www.census.gov/econ/census07/

11-11
12. U.S. Census Bureau, Establishment and Firm Size (Including Legal Form of 

Organization), 1997 Economic Census, Other Services (Except Public Administration). 

2007. https://www.census.gov/econ/census07/

13. Ibbotson Associates, SBBI Valuation Edition 2009 Yearbook. 2009. Chicago, IL. 

14. Damodaran Online, Data Page: Costs of Capital by Industry Sector, 2013. Damodaran. 

(Last accessed March 2014.) <http://pages.stern.nyu.edu/~adamodar/>

11-12